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ALB ASIA INSOLVENCY & RESTRUCTURING HANDBOOK 2020 ALB ASIA INSOLVENCY & RESTRUCTURING HANDBOOK 2020 “Clientsbenefitfrom[Latham’s]strongglobal footprintaswellasitsimpressivelocalexpertise, makingitago-toforcross-borderinstructions.” Chambers Asia-Pacific 2020 Restructuring/Insolvency (International Firms) in China Restructuring & Insolvency CHAPTER International Law Firm of the Year RESTRUCTURING China Business Law Awards 2020 AND INSOLVENCY 3 IN HONG KONG contact In Hong Kong, the statutory framework for regulating the affairs of insolvent companies is found in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (the “C(WUMP)O”) and Latham & Watkins LLP the Companies (Winding Up) Rules (Cap. 32H). The C(WUMP)O also 18th Floor, One Exchange Square 8 Connaught Place, Central cross-refers to and incorporates certain provisions of the Bankruptcy Hong Kong Ordinance (Cap. 6). Tel: +852 2912 2500 This chapter provides a broad overview of the restructuring and Fax: +852 2912 2600 insolvency regime in Hong Kong, including (i) the options available Email: [email protected] for companies in financial distress, (ii) the key considerations of which Website: www.lw.com stakeholders should be aware in an insolvency scenario, (iii) pre- Howard Lam insolvency transactions that are liable to be set aside, (iv) the existing Partner, Hong Kong, approach to cross-border insolvencies under Hong Kong law, and (v) Latham & Watkins the current status of proposed legislative reforms. Flora Innes Associate, Hong Kong, InnovativeSolutions.IntegratedPlatform. Latham & Watkins Jeffrey Wong I. What Options are there for Companies in Associate, Hong Kong, Financial Distress? Latham&Watkinslawyersprovidestrategicandinnovativelegal Latham & Watkins solutionstotheirclients’complexbusinessandlegalchallenges. A. Option 1: Restructuring without a winding-up Currently, there is no formal corporate rescue procedure under Hong Kong law. Pursuing workouts or schemes of arrangement are the two main ways by which a Hong Kong company in financial distress may restructure its debts without going through a winding-up. LW.com Latham&WatkinsoperatesworldwideasalimitedliabilitypartnershiporganizedunderthelawsoftheStateofDelaware(USA)withaffiliatedlimitedliability partnershipsconductingthepracticeinFrance,HongKong,Italy,Singapore,andtheUnitedKingdomandasanaffiliatedpartnershipconductingthepractice inJapan.Latham&WatkinsoperatesinSouthKoreaasaForeignLegalConsultantOffice.Latham&WatkinsworksincooperationwiththeLawOfficeof SalmanM.Al-SudairiintheKingdomofSaudiArabia.©Copyright2020Latham&Watkins.AllRightsReserved. 29 ALB ASIA INSOLVENCY & RESTRUCTURING HANDBOOK 2020 1. Informal workout scheme, the scheme must be approved by A workout comprises contractual all classes. Finally, once approved by the arrangements between a debtor company creditors’ meeting(s), the proposed scheme and its creditors. Being an out-of-court will be submitted to the court for final process, a workout process can be done approval. At that second court hearing, at any point in time, even concurrently the court will scrutinize compliance with with a scheme of arrangement. It is up the procedural requirements prescribed by to the parties to agree on an acceptable statute and the fairness of the arrangement arrangement between themselves. proposed between the company and its creditors. The terms of a workout plan are therefore highly flexible and may include the Initiation of a scheme process does not amendment and extension of a company’s activate any moratorium on creditors’ debts or the restructuring of its entire actions. This is why creditors’ schemes capital structure. Creditors may opt for a are sometimes coupled with a provisional consensual workout where the likelihood liquidation, such that companies can take and/or rate of recovery are higher than if advantage of the statutory moratorium the company were wound up. applicable to a provisional liquidation. 2. Scheme of arrangement Even where the company in question is not a Hong Kong company, a scheme may still A scheme of arrangement is a court- be sanctioned by the court so long as there sanctioned compromise/arrangement is a “sufficient connection” between the between a company and all its creditors foreign company and Hong Kong. (or a class of them), that is given statutory effect to bind all such creditors, even though not all of them have consented to B. Option 2: Winding-up the arrangement. The scheme procedure Under Hong Kong law, a winding-up, also known can be utilised by companies already in as liquidation, can be categorised into three liquidation as well as those that are not. types – members’ voluntary liquidation (“MVL”), creditors’ voluntary winding-up (“CVL”) and The scheme procedure involves a three- compulsory winding-up by the courts. step process. First, there is a first court hearing when the court decides whether A provisional liquidator may also be appointed to to grant leave for the scheme proponent protect the assets of a company at any time after to convene meeting(s) of creditors. Second, the presentation of a petition for the company’s meeting(s) of the company’s creditors (or winding-up and before the date on which a classes of its creditors) are convened and winding-up order is made. The appointment of held to vote on the proposed scheme. a provisional liquidator triggers an automatic Under Hong Kong law, a majority (that is, stay on legal actions or proceedings against the over 50%) in number, representing at least company subject to the leave of the court. This 75% in value, of creditors present and voting does not affect the rights of the secured creditors at a creditors’ meeting, must vote in favour to enforce their security. The court may exercise of the proposed scheme in order for it to be its discretion to appoint a provisional liquidator if approved at the meeting. Where there are it is satisfied that there is goodprima facie case multiple classes of creditors whose debts for the winding-up order and that the company’s would be compromised pursuant to the 30 ALB ASIA INSOLVENCY & RESTRUCTURING HANDBOOK 2020 assets are in jeopardy. Whilst the powers of a C(WUMP)O, a company is deemed to be provisional liquidator may include exploring a unable to pay its debts if (a) it fails (for restructuring of the company; in Hong Kong, a a period of three weeks) to pay, secure provisional liquidator cannot be appointed solely or compound for (to the reasonable for this purpose. satisfaction of the creditor) a sum equal to or exceeding HK$10,000 which is then 1. Where the company is solvent: members’ due and which has been the subject of a voluntary winding-up statutory demand; (b) it fails to satisfy (in Directors of a solvent but defunct company whole or in part) an execution or other may initiate an MVL of the company, by processes issued on a judgment, decree or (a) signing a certificate of solvency which order of any court in favour of a creditor; or declares that the company will be able to (c) if it is proved to the satisfaction of the pay its debts in full within 12 months after court that the company is unable to pay its commencement of the winding-up and debts, taking into account the prospective (b) convening a meeting of the company’s and contingent liabilities of the company. shareholders to consider resolutions for the winding-up of the company and for the a. Creditors’ voluntary winding-up appointment of a liquidator. A CVL is usually initiated by the directors who have determined that the company is A director who signs a Certificate of insolvent and unable to carry on trading. Solvency without reasonable grounds is The directors will resolve that a winding- liable to a fine and/or imprisonment (and up is necessary and call a meeting of the absence of reasonable grounds is shareholders, at which a special resolution presumed if it subsequently turns out that to wind up the company, and a resolution creditors cannot be paid in full within 12 nominating a liquidator, will be voted on. months). At around the same time, the company will call a meeting of creditors (which must be Once the company’s affairs have been fully held within 14 days after the shareholders’ wound up, the liquidator will draw up an meeting), at which, creditors may (amongst account of the MVL and call a final meeting other things) nominate their own liquidator of shareholders. The company will be and vote to establish a committee of formally dissolved 3 months after the date inspection to supervise the conduct of the on which the liquidator’s final statement of liquidation. account and the return of the final meeting are registered with the Companies’ During a CVL, the powers of directors are Registry. suspended, and the liquidator may exercise powers in relation to the company, as 2. Where the company is insolvent: CVL prescribed by the C(WUMP)O. There is no and compulsory winding-up automatic stay on proceedings or creditors’ There are two types of insolvent winding- actions in a CVL, but the liquidator or any up – CVL and compulsory winding-up. contributory or creditor may apply to the Though “insolvency” is not expressly court for directions or other orders. defined under Hong Kong law, the test for insolvency is whether a company in The liquidator will, to the extent possible, a winding-up petition is unable to pay realise all of the company’s assets and its debts. Under section 178(1) of the distribute the proceeds to creditors in 31 ALB ASIA INSOLVENCY & RESTRUCTURING HANDBOOK 2020 accordance with the statutory priorities claims and making distributions to creditors set out in the C(WUMP)O. As soon as the out of the liquidation estate. Once the company’s affairs are fully wound up, the company is fully wound up, the liquidator liquidator will call a final general meeting will apply to the court for a release and for of the company and make the requisite dissolution of the company. filings with the Companies Registry to dissolve the company. II. Stakeholders’ Roles and Section 228A of the C(WUMP)O prescribes Considerations in a Liquidation a special procedure by which directors may commence a winding-up, without first A.
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